Escrow is an accepted legal process that protects both the buyer and seller in a real estate transaction. As a concept, it dates back to medieval times, when a trusted third party was enlisted to hold property until sales conditions between a buyer and seller were met. The U.S. government mandated escrow accounts for mortgages to ensure funds for payment of taxes and fees and to reduce foreclosures. Today, it is a means for a third party to hold money in an escrow trust account prior to a purchase of real property and to ensure that no liens or encumbrances exist that would prevent transfer to the buyer. The escrow account also is designed to ensure that buyers make full payment to the seller prior to any official transfer documents being drafted.
Escrow Trust Accounts
The term "escrow trust account" describes an account in which property purchase funds are held by a third party, known as an escrow agent, until obligations or conditions of a transaction between buyers and sellers are concluded. The word "escrow" is a common term to describe accounts held for pending sales of real estate. An escrow is actually another term for holding an account in trust until certain specified conditions are met.
Escrow trust accounts are administrated by an escrow agent. It is the escrow agent's responsibility to maintain whatever property or funds have been placed in their custody until all conditions of disbursement have been performed -- as an example, payment of insurance, taxes and investigation to determine any liens and encumbrances that need to be paid off as a condition of sale. The escrow agent will hold the funds until these and all other conditions of sale have been met. An escrow agent acts as a custodian in a similar manner as a trustee of a trust that holds money for a beneficiary, except the trustee of a regular trust is subject to specific duties regarding control of funds on behalf of someone over a long period of time and not usually for a single sales transaction.
Rules and Regulations
Escrow agents are licensed and regulated in every state. Applicants are required to pass various minimum levels of experience and have established records of professional performance. There are variations between different states in terminology and between statutes. Most require agents to be bonded, insured and in compliance with certification standards. Some states refer to escrow and trust accounts as being synonymous, and in others distinctions between trust account, escrow account and escrow trust account exist.
Working with licensed and reputable real estate salespeople will assist in the selection of title companies and escrow agents in any area who have proven track records of professional service. Always be careful when dealing with any company located offshore or outside the country. Look for references and check with local regulators before initiating any transaction.
Retired investigator Chris Bradford has been writing since 1988. His work has appeared in "Security Journal," as well as various online publications. Bradford is a certified information-technology professional and fraud examiner.